Resilient residential sector still providing opportunity for developers and investors

Steve Wiltshire, chairman of HoldenCAPITAL Partners discusses the opportunities for developers and investors in the residential sector.

Image supplied by HoldenCAPITAL Partners

Steve Wiltshire, chairman of HoldenCAPITAL Partners

Oct 4, 2018

Recently HoldenCAPITAL Partners (HCP) has commented on the development sector and how well it has adjusted to the changes in funding availability, particularly as bank criteria such as full debt cover from pre-sales has heightened, and HCP also identified strong interest from non-bank lenders and investors alike, subject to sound project fundamentals.

Following a period of wariness HCP is now seeing many developers shifting away from bank funding and embracing the flexibility offered by non-bank lenders.

Steve Wiltshire, chairman of HCP told WILLIAMS MEDIA "More than ever before, they are engaging us to “do the hard yards” on their behalf and secure the best financial solution for their projects".

To some this might appear incongruous with the doom and gloom we constantly read about in the major papers, and other forums spruiking warnings about the risks of either developing or investing in the residential markets and how they are heading for Armageddon.

"We disagree, and in the absence of an unforseen event triggering a significant global financial downturn, we take the view that while some locations are being adversely impacted by a combination of oversupply, overpricing and tightened lending conditions, there are many more that are not," said Mr Wiltshire.

This shouldn’t be news to anyone experienced in the residential development sector.

They tend to be cyclical in nature with relatively predictable outcomes enabling experienced players to participate according to the prevailing demand.

Even during the GFC many successful projects were funded because the developers, lenders and investors all understood and capitalised on those fundamentals.

"Our team are currently witnessing this in the eastern seaboard markets with lenders and investors identifying consistent demand in many locations and backing well-conceived projects delivering appropriately designed and priced product.

While any developer worth their salt will tell you the one variable you have no control over once the ink is dry is the land cost and paying too much will leave you scrambling to make the deal work, this is particularly true in the current environment after we have witnessed significant uplift across the board.

"As a result HCP is seeing some developers overpay and this is proving problematic.

"That said, there are solid opportunities in South East Queensland and Melbourne, particularly with infill subdivisions and housing projects that meet the continuing demand from first and second homebuyers.

"The Sydney market is more difficult on the back of its long bull run and it is there that land values are most critical, but there are still good deals being done and we have no issues finding funders and investors to back well conceived projects."

There is interest in larger format projects from some lenders, however these are difficult to bring together in the current market and for the most part lender demand is for deals with a total development cost of $30-35 million or less.

"Deal volumes are consistent and we are not seeing signs of over building or rapid price rises."

There has been some overshooting in select areas, particularly in the high-rise and medium density sectors but for the most part the natural market forces and the departure of investment buyers has seen these projects dry up without a dramatic melt down and the market players adjusting their sights accordingly.

Similarly, experienced and sophisticated project investors are taking a well-considered view when looking to diversify their capital risk profile.

"At HCP we have a growing list of investors who recognise that in addition to the attractive returns available from these smaller projects, they also provide an ability to secure geographical
diversification across a range of projects.

"In fact many of our investors are developers in their own right who are happy to support another developers’ projects if they don’t have their own readily available.

"Our take is that it is far from being a doom and gloom environment for the residential sector, and there continue to be sound opportunities for all concerned providing they do their homework and engage with experienced operators across all facets of the project," Mr Wiltshire continued.

"In the end, while there is no substitute for experience there are many ways to tap into it."